LECTURE 9: ADVERTISING COSTS AND MEDIA, ECONOMICS OF ONLINE ADVERTISING

1. LECTURE 9: ADVERTISING COSTS AND MEDIA,ECONOMICS OF ONLINE ADVERTISING AEM 4550:Economics of AdvertisingProf. Jura Liaukonyte

2. Lecture Plan • Instead of Tue March 5 class: experiment in the lab • Advertising Costs • DVRs • Ad Avoidance • Search advertising • HW 3

3. Media Selection • Coverage is the theoretical maximum number of consumers in the retailer’s target market that can be reached by a medium and not the number actually reached. • Reach is the actual total number of target customers who come in contact with an advertising message. • Cumulative Reach is the reach that is achieved over a period of time.

4. Media Selection • Frequency is the average number of times each person who is reached is exposed to an advertisement during a given time period.

5. When High Frequency Is Used • A new brand • A smaller, less known brand • A low level of brand loyalty • Relatively short purchase and use cycle • With less involved (motivated and capable) target audiences • With a great deal of clutter to break through

6. Media Selection • Cost Per Thousand Method (CPM) is a technique used to evaluate advertisements in different media based on cost. • The cost per thousand is the cost of the advertisement divided by the number of people viewing it, which is then multiplied by 1,000.

7. CPMs • Cost measured per thousand impressions (CPM)‏ • Broadcast TV: $10 CPM for 30 second impr • Superbowl 30 second spot: $25-40 CPM • Around 1 cent per 30 sec impression; 2 cents for 1 minute; 20 cents for 10 minutes • Conclusion: TV network is paid 20 cents an hour of content for your attention

8. Typical CPMs • Outdoor: $1-5 CPM • Cable TV: $5-8 CPM • Radio: $8 CPM • Online • Display $5-30 CPM • Contextual: $1-$5 CPM • Search: $1 to $200 CPM • Network/Local TV: $20 CPM • Magazine: $10-30 CPM • Newspaper: $30-35 CPM • Direct Mail: $250 CPM

9. Network TV CPMs • CSI $19.59 • Without a Trace $13.83 • CSI Miami $17.30 • Desperate Housewives $11.81 • Everybody Loves Raymond $25.19

10. Gross Rating Points • GRPs = Reach X Frequency. • GRPs measure the total of all Rating Points during an advertising campaign. • A Rating Point is one percent of the potential audience. For example, if 25 percent of all targeted televisions are tuned a show that contains your commercial, you have 25 Rating Points. • If, the next time the show is on the air, 32 percent are tuned in, you have a total of 25 + 32 = 57, and so on through the campaign.

11. Media Tactics • Three ways to schedule the same number of GRPs • Continuous • Flighting • Pulsing

12. Selling Network Television NETWORKS SELL THEIR TIME IN 3 STAGES: The Upfront Market The Scatter Market The Opportunistic Market

13. Television Sells Spots Like Airlines Sell Seats • If a flight leaves with empty seats, revenue for the seat is zero. • To assure full planes, sell the seats at a price that will sell them out early. • Charge last -minute buyers highest price

14. THE UPFRONT MARKET • Annual purchase of commercial time well in advance of the telecast time. • Upfront advertisers buy 70% of prime time and 50% of other dayparts. Most buy for one year. Get best price. • Biggest national advertisers buy children’s programs, prime time, daytime, news, and late night.

15. SCATTER MARKET • Sale of most of the year’s remaining inventory not sold at upfront. • Inventory generally tight. • Prices usually 50% higher than upfront.

16. OPPORTUNISTIC MARKET • Last-minute buying of inventory due to: • Changes in programming • Advertisers don’t want to be on controversial programs • Advertiser inability to pay

17. Cancellations and Guarantees • Most network orders are non-cancelable. If an advertiser cannot or does not want the time, it is the advertiser’s responsibility to sell the time - not the network’s. • Networks cancel programs with no notice to the advertiser with the provision that commercials will run in another program that delivers the same audience profile.

18. Ratings Guarantees • The cost of network time is based on network guarantees of spot price vs. audiences, computed in cost per thousand. • If the ratings projected by the network to the advertiser are not achieved, the network runs the spot in other programs to accumulate sufficient ratings to bring the CPM down to the promised level. • The extra spots the advertiser gets are called MAKEGOODS

19. DVR Penetration

20. A Major Concern: • Forrester predicts US HH to watch 15% fewer commercials due to DVRs • 47% of [DVR] respondents skip ads most of the time (Jupiter Media) • 60% of advertisers plan to decrease TV ad budgets due to DVRs (Association of National Advertisers and Forrester Research) • American Advertising Federation poll finds ¾ of ad execs feel DVRs will significantly affect TV advertisement methods

21. “In short, the [advertising] industry is in deep doo-doo.”Crain’s New York Business Oct. 27, 2008

22. Advertising and Consumers • Do consumers like ads?

23. Why Avoid Ads? • 3 main reasons viewers don’t watch commercials: • Not interested in the creative execution • Seen the commercial too many times • The advertised product isn’t relevant to them

24. DVRs and ad avoidance • DVRs may increase commercial avoidance, BUT: • Facilitate the measurement of commercial avoidance • Advertisers can use ad avoidance data to improve creative strategies, targeting, message rotation and scheduling, media buying, and ROI (return on investment) measurements • The very act of fast-forwarding requires that the viewer pay attention • Alternatives: viewers getting up to go to the fridge or the bathroom or turning away to the computer or to talk to someone else in the room or flipping the remote around the channels • There can be a real effect on purchasing behavior due to the attention required

25. Advertisers Adapting • Advertisers figure out ways to take advantage of the attention fast-forwarding requires • Improve ad creative itself • Reduce viewers’ motivations to fast-forward

26. Advertisers Adapting • Advertisers can use information gathered from DVRs to figure out how to combat fast-forwarding • Target niche audiences to tailor more effective advertising • TiVo’s Stop||Watch is tracking second-by-second viewing among all users and 20,000 DVR users with demographic data known • Networks will adopt to fast-forwarded commercials by: • Further integrating products into programming – product placement • Tricking viewers by changing the length of commercials • Integrating Tune-ins for the show that is being watched • Downside: may annoy viewers

27. One Early Study Finds No DVR Effect • Why no DVR effect? • Advertising does not work • People do not skip many ads • People in control group zap anyhow • People attend to what they skip • Mandese (2004) finds 67% of DVR viewers notice the advertisements they forward through • Multiple ad viewing from repeat plays

29. ONLINE ADVERTISING

30. ONLINE ADVERTISING Online Advertising • Partially Based on HBS case “Google Advertising”, which is a required reading • Online Advertising Models • Measurability • Google Advertising Revenues

31. Online Ad Formats • Floating ad: An ad which moves across the user's screen or floats above the content. • Expanding ad: An ad which changes size and which may alter the contents of the webpage. • Polite ad: A method by which a large ad will be downloaded in smaller pieces to minimize the disruption of the content being viewed. • Wallpaper ad: An ad which changes the background of the page being viewed. • Trick banner: A banner ad that looks like a dialog box with buttons. It simulates an error message or an alert. • Pop-up: A new window which opens in front of the current one, displaying an advertisement, or entire webpage. • Pop-under: Similar to a Pop-Up except that the window is loaded or sent behind the current window so that the user does not see it until they close one or more active windows. • Video ad: similar to a banner ad, except that instead of a static or animated image, actual moving video clips are displayed. • Map ad: text or graphics linked from, and appearing in or over, a location on an electronic map such as on Google Maps. • Mobile ad: an SMS text or multi-media message sent to a cell phone.

32. Search Advertising • Highly effective since it reaches people when they are interested in a topic • Relevant, yet not obtrusive • Has expanded rapidly in last few years

33. Online Advertising Measurability • Huge advantage in measuring effectiveness • Pay per click • Conversion tracking • Value of ranking system • Ranks ads by bid x ad quality • Show ads likely to get the most valuable clicks in the most prominent position • E.g., “best ads get best exposure” • Creates a virtuous circle: individuals want to click because results are relevant

34. Search Advertising • Search advertising estimated to be 6 times more effective than a banner ad • Delivers qualified leads • 80% of Internet user sessions begin at the search engines (Source: Internetstats.com) • 55% of online purchases are made on sites found through search engine listings (Source: Internetstats.com)

35. Search Engines Market Share Today (2012)

36. Internet Advertising Models • For what exactly should advertisers pay and when? • When the ad is being shown to the user • When the ad is being clicked by the user • When the ad has “influenced” the user in the sense that its presentation lead to a “conversion event” • Conversion event- the actual purchase of the product advertised in the ad • Why wouldn’t an advertiser favor number 1?

37. Student Example Airline Industry

38. Total Online Advertising Spending (in thousands of dollars)

39. Online Advertising • Search advertising • Interactive Ads • Banner and Pop-up ads • Facebook and social networking • Online giveaways • Promotional pricing- legal low fares • Airline websites, travel sites, booking sites

40. Targeting Consumers • Ad Words • Ad Sense • Flight history: delays, cancellations, lost bags • Click responses • Geographic location, surfing patterns, airline ad exposure

41. Interactive Ads Southwest “Ridiculous”

42. Banner Ads

43. Facebook

44. Websites

45. Websites

46. Websites

47. Advertising Payment Methods • CPM – Cost per Mille – an advertiser pays per one thousand impressions of the ad (“Mille” stands for “thousand” in Latin); an alternative term used in the industry for this payment model is CPI (Cost per Impression). • CPC – Cost per Click (a.k.a. Pay per Click or PPC; we will use these terms interchangeably) – an advertiser pays only when a visitor clicks on the ad, as is clearly stated in the name of this payment model. • CPA – Cost per Action – an advertiser only pays when a certain conversion action takes place, such as a product being purchased, an advertised item was placed into a shopping cart, or a certain form being filled. This is the best option for an advertiser to pay for the ads from the advertisers’ point of view since it gives the

48. PAY-PER-CLICK Advertising Model • Targeted advertisement based on two effectiveness measures: • Click-Through Rate (CTR): specifies on how many ads X, out of the total number of ads Y shown to the visitors, the visitors actually clicked; in other words, CTR = X/Y. CTR measures how often visitors click on the ad • Conversion Rate: it specifies the percentage of visitors who took the conversion action. Conversion rate gives a sense of how often visitors actually act on a given ad, which is a better measure of ad’s effectiveness than the CTR measure

49. Recent History of CPC Method • Cost Per Click is the predominant advertising payment method, made popular by search engines such a Google and Overture (now part of Yahoo!). • Google introduced CPC AdWords program in 2002. • Combining a particular ad payment method with a particular targeting method. For Google and Yahoo! the two main models are the keyword-based PPC and the content-based PPC models.

50. Cost Per Click Two problems with the Cost per click model: • Although correlated, good click-through rates are still not indicative of good conversion rates • It does not offer any “built in” fundamental protection mechanisms against the click fraud